Pandemic adds a level of difficulty in understanding market
February and March metrics looked great for most manufacturing technology providers. USMTO orders were up, month over month, in both months. The Cutting Tool Market Report showed a sharp uptick in January, and the forecast for cutting tool demand released in December pointed to a strong rebound starting in the second quarter. Government metrics like the Census Bureau’s M3 Series on manufacturing shipments, orders, and inventories pointed to a continuation of an upward trend in manufacturing. Unfortunately, the coronavirus pandemic impacted our nation’s economy and our industry’s health in an instant and highlighted the weakness of trend data to help guide our strategic decisions. In response, companies have developed market-reading teams that meet on a daily and weekly basis about what is happening in the market and are adjusting plans on a weekly – if not a daily – basis.
Manufacturing technology equipment (i.e., machining centers, presses, lasers) lead downturns in the durable manufacturing business cycle while manufacturing technology consumables (i.e., cutting tools, workholding) lead upturns in the manufacturing business cycle. The current crisis seems to have turned this relationship on its head. As noted, USMTO orders were up in both February and March with expectations that April orders will fall by less than 10% and that May orders will fall by 15-20%. In comparison, cutting tool shipments fell 4% in February from January levels, two months before equipment orders fell. Based on insights from a couple dozen tooling firms, the tooling industry will post a 10-15% decline in March and declines of more than 30% in both April and May, and most believe that tooling orders will reach a trough in June.
This reversal in the two elements’ roles in identifying a downturn probably rests with the sudden nature of the downturn. Paraphrasing one member’s theory, the faucet was shut down to a trickle in the middle of March on new business opportunities in equipment sales and in shipments of consumables. Equipment providers have been able to continue to move existing quotation activity into orders in March and April while cutting tool orders and shipments were crushed in the same time frame. There is still a trickle of quotation activity for equipment, but builders and distributors will likely see a significant drop in orders during May and June. If manufacturing operations begin to expand activity in June, then July or August should show improving business for providers of manufacturing technology. An overwhelming percentage of AMT members polled do not expect to see a V-shaped recovery even with sharp, upward growth rates as businesses get back to work. Most members believe that it will be the first or second quarter of 2021 before we get back to fourth-quarter-2019 levels. Their projections match up nicely with the forecasts by IHS and Oxford Economics. Oxford Economics forecasts GDP growth of 8% and 19% for the third and fourth quarter respectively, but they are still projecting that the U.S. economy will not grow back into fourth-quarter-2019 levels until the second quarter of 2021 (see graph included).
USMTO data through the first quarter reports that cancelations for the first quarter were below historical averages, sitting at 2.6%, and validates responses to members polled. The market in March showed that contract machining orders grew by 12%, and other industries, such as defense and space and medical equipment, continued to be strong. Members have shared that contract machining was softer in April but that defense and space and medical remained strong while Tier 1 and 2 suppliers to the auto industry were preparing for the major auto manufacturers to reopen at the end of May or early June. Companies are stretching budgets and cash to retain employees as they expect challenges to reemploy top workers as they, their competitors, and customers all begin to increase capacity throughout the summer months. AMT members widely report that their customers are placing orders for projects they are committed to and projects they are prepping for in the late fall. End-users don’t seem to be canceling programs, just delaying immediate investments to preserve liquidity.
I want to thank all those who have shared their stories and sent in their perspectives on the market. I also want to thank the social groups meeting weekly who have shared their insights and helped identify opportunities. We have also been asked how our members can become part of a web conference network. There are two ways to leverage the experience of others in the membership. First, if you are comfortable with sharing your question or idea with the entire membership, post it to the AMTNews.org forum page. Second, if you would like the smaller audience and social aspects of a group, Steve Lesnewich, vice president of membership services, would be glad to help put groups together. If you are interested, contact Steve at (703) 827-5227 or email him at slesnewich@AMTonline.org.